First time business - should I be worried, or am I just being paranoid?

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New Member

This is my first time starting a business, and I am very nervous. For one, my partner wants to start a corporation so we can get funding easier. Sounds sensible to me, and while I'm a little more nervous about starting a corp (because I don't know much about a corporation) I think it makes more sense from a $$$ standpoint.

However, one thing that I'm really nervous about is this: my partner says that he will be paying my salary (which is very low for my industry, I have no college degree so I'm just glad I'm getting paid), BUT I won't get any of my "dividends" (I believe that's how corp shareholders are paid profits right?) until I "pay off" the money he put in for my salary.

While this sounded very reasonable to me at first (he offered me this deal after I did a project for him without any shares, and now I'm getting 50% of the shares + the same pay as before), after giving it more thought I'm getting a little nervous.

Is this standard business practice? Should I be expecting more?? Normally, how do these things work?

I just don't want to owe him any money down the road, and I'm getting a little nervous about this all. I'm just confused I guess...

What are your guys' thoughts? I'm going to talk more to my partner about this next week.

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Premium Member

Premium Member

Welcome to Business Advice Forum GoudaGood and thanks for posting your business questions. If you could please provide a little more info along the lines of the following questions, our members will be able to give you more helpful replies;

Will your partner be working in the business on a day to day basis? If so, will he be working a similar number of hours as you and will he also be getting paid a salary?

What gives you concern that you could owe your partner money in the future?

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Banned

Basically, what he's trying to say is, you won't get any of the dividend money while you are being paid a salary. In other words, you're working for free for him for a while.

Say, for explanations' sake, you're paid $1000 a week. Say that dividends equal only $500 per week when divided between the two of you. You won't get any of the dividends until your initial payment is paid off. So you'll only start getting the dividends on the third week.

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Member

GoudaGood, I think a "gouda" first step (sorry) is one you've already mentioned: further discussion with your partner to get more details. There are a number of possibilities that could be at work beneath the scenario you've sketched; some of which could be reasonable and fair, while others could be decidedly inequitable. There's no way to say without more info.

Digressing a moment to your parenthetical question, it's correct that dividends are the typical mechanism by which corporate profits are distributed to the shareholders. On this point, though, be sure you guys have retained an accountant with tax law expertise, because in certain situations (viz, your corporation is a "C" corp for tax purposes, and a shareholder is also actively working for the company) it's usually the case that a salary / bonus package, to the extent reasonable, is a much more tax-efficient way of getting at least some portion of corporate profits into the shareholder's hands, as compared to dividends.

You mention that the arrangement requires your share of the dividends to be diverted to a repayment of your salary-to-date, until such time as the latter has been paid off. That by itself suggests that your salary is actually some form of loan, similar to a new salesperson receiving advances until he begins generating sales, with the advances to then be deducted from his commission checks. But if that's the case, it has the economic effect of your not being compensated for your services.

But as I mentioned, more of the details are needed. There could be other aspects of the arrangement which, when taken together, make the deal reasonable and fair. Also keep in mind that even if your partner's proposal turns out to be inequitable, it's not necessarily a case of willful intent to give you the short end of the stick. It might just be a matter of confusion on his part as to how such a deal should be structured.

Frequently when a multi-partner or -shareholder biz is being assembled, the co-owners-to-be enlist the services of an attorney and/or accountant in the 'assembly' process. This advisor helps draft the shareholders' or partners' agreements, to ensure that all of the partners' intentions are properly captured in the language of the agreement, and that all provisions in the agreement are fair to everybody, and understood by all. If either you or your partner are unsure as to any aspects of your proposed deal, it'd likely be a good move to talk with an advisor, to head off any potential blow-ups down the road.

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Member

Yes I agree with Grumpy I think that is what your partner trying to do.However In business it is normal to be nervous but you must need to disregard this,Some successful businessmen are really enjoying on their business.You should enjoy it.

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New Member

Thank you guys for the very helpful replies! I was half expecting to come back to the forum with no replies, you guys are awesome

I'm going to talk more with him this week, I agree with you Grumpy that I will essentially be working "for free" for a while, which is OK with me.

ArcSine - thank you very much for your well put, and thought out, post. I will keep all of that in mind, and I might indeed need to have to bring some legal advice in. Unfortunately, I'm a kid and can't afford an accountant .

I think I'll just go for it. I have the habit of getting nervous about everything, but I am excited about this and believe in the product. So we'll see how this goes.

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Premium Member

Premium Member

Something that I would strongly recommend GoudaGood is that you and your partner put a written agreement in place that covers things such as;

The share of the business that each of you will own

Your respective responsibilities and duties in the business

Working hours, holidays, breaks, etc.

Sharing of profits

How you would deal with losses

What if one partner wants to leave the business

How you make decisions that affect the business

What to do in the event of disagreements.

Everyone starting a business obviously hopes that everything works out well. However, unfortunately things sometimes can and do go wrong. Having a comprehensive partnership agreement in place can provide a lot of clarity and save a lot of heartache, should their be disagreements in the future.

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New Member

Not a bad Idea of your friend if suggesting you with corporation plan, Many Corporate Advisory companies are there to help you setting up a company. one can easily take assistance in Auditing, accounting, taxation, company registration, work pass application, corporate secretarial services...these are the name of few things you must be facing in future. So nervousness is natural but bets to take a help or advice at least once in a start up.

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